Few subjects are less fun to talk about than debt. Everyone wants to be secure financially. Having a great income is a good place to start but limiting the amount of money that you must pay other people each month is really where you can build wealth. When you die with debt that is something that will weigh down your ability to pass on whatever wealth you have created to your beneficiaries or heirs. What you need to bear in mind is that there are steps you can take to minimize the impact that debt will have on your estate planning, however.
While it is true that your debts will survive your death that does not mean that there is nothing left for us to discuss. Managing your debts after you pass away will be the responsibility of whoever is the executor of your will or is administering your estate in you pass away without a will. In addition, there are laws in place that can protect certain property items of yours from debt collectors after you pass away. What we are going to talk about in today’s blog post from the Law Office of Bryan Fagan is how to think about debt when you or someone close to you passes away. Who can manage your debts after death and what sort of debt recovery methods are not allowed in Texas will also be discussed.
Does debt vanish after you pass away?
Debts do not vanish or go away after you pass away. A debt collection agency, law firm, or the actual lender itself can come after your estate for any money owed to them. Additionally, if money is paid out of your estate before settling any debts, then your administrator or executor will have to deal with claims from creditors. Even your beneficiaries or heirs could be subject to having that money tied up in additional court proceeds after having it distributed to them in a probate process.
Some claims made by creditors are valid while others are not. The law in Texas states that many steps must be followed by a debt collector when it comes to claiming a deceased person’s estate. On top of that, if the claim that the creditor or debt collector is making is valid then there are additional hoops that must be jumped through first. The best thing that you can do when you are creating a will or planning for end-of-life circumstances is to speak with an experienced estate planning attorney with the Law Office of Bryan Fagan. We can guide you through what debts may be subject to collection efforts after you pass away and which would be more protected.
What debts do not have to be paid after you pass away?
If you are trying to establish reasons why a particular debt may not have to be paid after you pass away, then fortunately for you there is a laundry list of reasons why. First, your estate just may not be large enough to satisfy the debt. When your estate is insolvent, your debts outnumber your assets. You have a negative net worth at the time of your death and therefore cannot pay off any debts. Hard to get blood out of a turnip as my grandpa would tell me. If you are curious, you can do a detailed analysis of your current state of wealth to determine if you have a negative or positive net wealth right now.
For example, let’s consider an unsecured creditor like a credit card company. If your representative provides notice to the creditor of your passing, then that credit card company has roughly four months to present a claim to a court. If the creditor does not go forward with bringing forward a claim, then it loses the right to do so later. There are also situations where a statute of limitations may bar a creditor from coming after your estate regarding a debt that is owed to them.
Are there types of property in your estate that will be exempt from the debt collection process?
Even if your estate has debt on its ledger, it could be that there are some debts that creditors are barred from trying to collect. Homestead protections exist under the Texas Property Code for homeowners of a certain age. Your spouse and minor children under the relevant statute would also be protected from a debt collection company trying to come after them for this debt. Under Texas law, a probate court may establish an allowance for your family such as your spouse who has survived you, your minor children, and any adult children of yours who suffer from a disability. This maintenance amount of money can last for up to one year after you have passed away.
Who will oversee paying your debts?
An executor of your will or the administrator of your estate will oversee paying your debts if a valid claim for debt repayment is made. If your estate goes through probate, then the probate court judge will require that your administrator or executor notify potential creditors of your passing. This will put the estate in a position where your beneficiaries or heirs may have to have payment of property delayed or at worst have those payments ended prematurely if the estate must pay debts out first. We have already mentioned how an estate can become insolvent due to its need to pay debts over time.
On the other hand, if your estate does not go through a probate court then it is still a good decision to have your spouse, family member or executor attempt o reach out to known creditors of yours to notify them. These folks can potentially hold your estate administration process open for considerably longer than you would like. However, it is better to get this subject right the first time rather than through it again once a creditor found out that your estate has been paying beneficiaries before paying them. The law in Texas protects creditors and this area is no exception.
Is it necessary to go to court to settle an estate debt?
The specific type of debt and property that you own at the time of your death will determine whether your administrator or executor will need to go through the probate court to settle your debts and pay out beneficiaries under your will. The first thing that you can do to gain some degree of comfort with this is to meet with an experienced estate planning attorney with the Law Office of Bryan Fagan. Our attorneys excel in taking your specific situation and providing you with information that you can act on. Many times, you will be required to have an attorney in probate court. Our attorneys can make or break the case that your executor will have to defend.
One of the related questions that I will raise at this stage is how will someone know which debts of yours must be paid. The money to pay those debts comes out of your estate rather than the pocket of your administrator or executor. Funeral expenses can be paid up to $15,000 as well as expenses related to a hospital stay or any other costs associated with the condition that led to your passing. Any other expenses related to the maintenance of your property, such as storing it in a facility or otherwise maintaining it, will be allowed by a probate judge. Finally, debts and debt payments are to be paid out of your estate property.
As it may happen multiple creditors or entities may ask to be paid money for debts and other reasons. The Texas Estates Code contains language as to what order those creditors should be paid given that most people die with limited funds. Therefore, it is important to establish an order for multiple debtors can be paid in the most efficient way possible. Creditors that are higher on the list may be paid while creditors who are not ranked as highly will not be paid.
The number one type of claim that will be paid out of the body of your estate are funeral expenses and hospital/doctor expenses related to medical care that you received immediately before your passing. There is a $15,000 limit to these figures that can be paid first. If the expenses of this type are above $15,000 then those amount(s) will be classified in some other way and will not be able to be paid out first from your estate.
There are various costs associated with administering your estate. For example, you may own property that needs to be attended to or maintained for whatever reason. Grass needs to be cut on land. Animals need to be attended to. Your classic car that is 75 years old may need to have some sort of care routine kept up after you have passed away. Whatever the circumstances are, these expenses are given second billing as far as those that can be paid out of the estate and given priority in this regard.
Next, you may owe a secured creditor money and in which case their debts can be paid back in the third priority position. Secured creditors are those creditors for whom property can be pulled back as collateral if the debt is not paid. A car loan is an example of a creditor who, if you do not pay the loan, can come back, and take your vehicle as a result. There is a legal process involved with repossessing property like this.
Child support is a matter the legal system takes very seriously. Ask any of the experienced family law attorneys with the Law Office of Bryan Fagan and they will tell you that the failure to pay child support on time and in full each month can get parents into hot water. Even in a situation where you pass away your child support obligation does not get washed away like running your hands under the faucet after eating a meal. Rather than child support obligation sticks around. You can expect that if you owe child support at the time of your passing that the child’s mother and/or the Office of the Attorney General will attempt to recoup as much of that child support as possible. Their claims are fourth as far as priority is concerned on this list.
Taxes, penalties, and interest come next on the priority list at number five. Death and taxes are the only sure things in life, some say. Well, this is where the two subjects intersect. If you owe money for federal taxes, property taxes, and things of this nature those claims can be pursued against your estate. Doing your taxes properly and making sure that you have this taken care of before your passing is a great way to eliminate one of the major concerns that people have as far as estate planning is concerned. Many people have worries about matters related to estate planning, but they do little to handle those concerns. Taxes are a universal issue for all of us. If you can get your tax situation correct as an estate planning matter, you can make life much easier for the person who handles your estate as well as for your beneficiaries or heirs.
Unsecured debts fall to the bottom of the priority list. Probably the most common type of unsecured debt is credit card related but student loans are another type of debt where the creditor does not hold any collateral. These are a lower priority in a bankruptcy proceeding during your life and the same principle applies after your passing, as well. Federal student loans do not continue to follow you after your passing but private student loans may. You should verify that, but it is my understanding that private student loans can become a creditor who attempts to be made whole even after you pass away.
Who else may be responsible for paying your debts?
Someone else may be responsible for paying your debts of yours. The primary example of a person who may be responsible for a debt that you validly contracted for is a co-signer. Co-signing a delicate proposition. Typically, a potential creditor would ask for a co-signer in a situation where you lack the financial wherewithal to ordinarily qualify for a loan. For example, let’s say that you wanted to borrow $20,000 to purchase a vehicle but did not make enough money, had too short of a credit history, or had a history of failing to pay back loans on your record. In that case, the lender may ask you to obtain the signature of a co-signer to give them another option to pursue payment of the loan if you default on it.
Co-signing is a risk. The person that you spoke to about co-signing may be a close family member who had a soft spot in their heart for you and a result was willing to put their financial well-being on the line in signing a document on your behalf. This extends past your lifetime and into the period after your passing. This co-signer hopefully understands that even after your death he or she can still be pursued by a creditor for a loan that was intended to help you during your lifetime.
Estate planning- best to get to it now
Estate planning is one of those subjects where it is all good and well to discuss it as subject matter, but it cannot do much good for our families unless we get to it and complete an estate plan. There is no one size fits all estate planning. You can’t just go to a lawyer or go online and tell someone that you’ll have what your friend ordered last year. Rather, you need to take into consideration the needs of your family as well as your estate before moving forward with an estate plan.
If you honestly do not know where to begin, but you know that you do need to begin, then working with an experienced estate planning attorney is a great place to begin. An experienced estate planning attorney can educate you, answer questions and allow you to make good decisions under their guidance. You will learn the information necessary to weigh different options in estate planning. From there, you can feel confident that the decisions you make are in your best interests and those of your family and beneficiaries, as well.
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